Navigating Business Rapids - The CFO-Pro Newsletter

Some businesses operate under the assumption that Cash Flow will solve most problems. The thought process continues that if the business generates enough volume, profitability will eventually take care of itself. The end of the free flowing credit markets has challenged that belief. Lack of profitability creates a cycle that will eventually destruct and ultimately dissolve the business.

A thoughtful competitive analysis: Really understand your competition. What are their expenses? Overhead? Business Philosophy? Are they profitable? Do they have a sound business model? Will they still be a competitor to you in 5 years? Don’t assume that if their prices are lower, that they are doing something right. They may very well be giving the business away and there’s no need to match pricing under that circumstance. Understand your value and use this information to your competitive selling advantage.

Understand Your Value: The value of the business service is based largely on market perception. What value does the market place on your service? Business purchasers and consumers are very educated now on costs and the value of products and services. You will have to make a strong case for your pricing model and understand what they value to procure the prices that you want.

Know Your Costs: The U.S. Small Business Administration advises that the cost of producing any service includes materials, direct labor (direct and supervisory) and overhead. Overhead costs include all other salaries and wages incurred to run the business, plus rent, utilities, office supplies, insurance, depreciation, advertising, etc. The SBA states a reasonable amount of these overhead costs should be billed to each service performed—whether in an hourly rate or a percentage. You need to charge rates that cover current costs (not last year), including wage increases and inflation.

Determining Your Pricing: In today’s economic environment you will find fall out of competitors. Those that were operating on the assumption that volume will take care of profitability are trying to survive and are no longer formidable competitors. This is a perfect time to assess your business’ profitability and pricing model. It’s also time to re-evaluate. What has worked in the past may not work in this environment.

Three common methods of pricing are hourly rates, flat fees, and variable pricing, where negotiating helps set the price for each customer.

If your pricing model has not been profitable for each transaction in the past, now is the time to evaluate it. CFO-Pro can conduct an analysis of your current model, assess the costs you are allocating to each transaction, determine if there are areas to increase efficiencies and create a model that will help your business compete and win in today’s market. Contact us at 630.778.7646 or email me at jlafferty@cfo-pro.com to learn how to build a sustainable, profitable pricing model.

The Wisdom of Henry Hazlitt (1894 - 1993)

An American manufacturer of woolen sweaters goes to Congress and tells the committee concerned that it would be a national disaster for them to remove or reduce the tariff on British sweaters. He now sells his sweaters for $30 each, but English manufacturers could sell their sweaters of the same quality for $25. A duty of $5, therefore, is needed to keep the American in business. The fallacy here is the result of looking only at the immediate effects of a single tariff rate on one group of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers.

A tariff wall results in a net loss to the country. The tariff reduces the American level of wages. Here is how this happens. The added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles. There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced.

From the consumer's point of view, he buys less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced.

It is true that a tariff hurts all consumers as such. It is not true that it benefits all producers as such. On the contrary, it helps the protected producers at the expense of all other American producers.

The effect of a tariff is to change the structure of American production. It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another. It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller. Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.

Every other month, Business Mastery provides financial tools that improve bottom-line results and build business equity.

CFO-Pro can assist you in implementing these tools in your business. We specialize in identifying the causes of negative trends and ways to take corrective action.

Feel free to forward this newsletter to others and send us your questions or suggestions for future issues. Free subscriptions are available on our website, CFO-Pro.com, from the Newsletter page.